BANKS TOLD THEY NEED $75 BILLION IN EXTRA CAPITAL

By EDMUND L. ANDREWS; Jackie Calmes contributed reporting.

Published: May 8, 2009

CORRECTION APPENDED

After subjecting the nation's biggest banks to the most public scrutiny in decades, federal regulators ordered 10 of them on Thursday to raise a total of $75 billion in extra capital and gave the rest a clean bill of health.

The long-awaited results of the ''stress tests'' set off an immediate scramble by major institutions for more capital. By June 8, they must give regulators their plans for raising the money, and raise it by November.

The verdict was far more upbeat than many in the industry had feared when the tests were first announced in February. And the banks that came up short will have to raise much less than some analysts had expected as recently as a few days ago.

The stress tests were aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected. But regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits and also by letting them predict modest profits even if the economy again turns sour.

Despite an almost tangible sense of relief among the banks and investors, the report card is unlikely to silence an intense debate over whether the Treasury Department and the Federal Reserve let the banks off too easily and glossed over their problems.

Under the worst-case assumptions -- an unemployment rate of 10.3 percent next year, an economic contraction of 3.3 percent this year and a 22 percent further decline in housing prices -- the losses by the 19 banks could total $600 billion this year and next, or 9.1 percent of the banks' total loans, regulators concluded. That rate of loss would be higher than any other since 1921.

But while the adverse situation was supposed to be unlikely, it is not that much worse than what has happened so far. Unemployment hit 8.5 percent in April and could top 9 percent as early as Friday, when the Labor Department releases its employment report for May.

Bank of America was told it would have to come up with $34.9 billion. Wells Fargowill have to find $13.7 billion. And Citigroupwill have to produce another $5.5 billion, on top of the $52.5 billion that it had planned to acquire by letting the Treasury become its biggest single shareholder as part of a broader deal.

Industry executives reacted with jubilation, as if they had proved their critics wrong and passed the tests with flying colors.

''The results off the stress tests should put to rest the harmful speculation we have seen over the past few months,'' declared Edward L. Yingling, president of the American Bankers Association, hours before the results were even made public.

Investors had already bid up share prices of the big banks in reaction to leaks about the results earlier this week.

Regulators and bank executives alike predicted that most of the institutions would be able to build up the necessary capital from private sources -- either by selling off assets or by converting shares of preferred stock into ordinary stock.

''With the clarity that today's announcement will bring, we hope banks are going to get back to the business of banking,'' Timothy F. Geithner, the Treasury secretary, said Thursday.

Wells Fargo immediately announced that it would raise $6 billion through a new stock offering. Morgan Stanley, which was told to raise $1.8 billion, announced plans for a $2 billion stock offering.

GMAC, the financing arm of General Motors, will need to find $11.5 billion in capital. Last week the government gave GMAC more federal funds after it agreed to be the lender for purchasers of Chrysler vehicles while Chrysler is under bankruptcy protection. Earlier this year, the Treasury Department supplied the company with $5 billion through its Troubled Asset Relief Program.

Regulators did not push for the ouster of any chief executives, or demand any specific board shake-ups. They also said they would not subject the rest of the nation's banks to similar stress tests or require them to have additional capital buffers.

But Treasury and Fed officials said they would press banks to improve their governance and would reserve the right to demand changes in management.

Indeed, Bank of America is expected to announce that it will start recruiting fresh board members in a bid to strengthen oversight.

''That won't add one extra dollar to a bank's capital buffer against losses,'' Mr. Ely complained. ''It's just moving capital from one place to another.''

From the start, Treasury and Fed officials have steered between what Mr. Bernanke recently described as ''Scylla and Charybdis'' -- being perceived as too easy and too coddling of banks on the one hand, or so tough and antagonistic that investors and consumers alike become even more anxious.

But the big question, which remains unanswered, is whether Mr. Geithner and Mr. Bernanke will in fact confront banks over their risk management practices in a way that regulators have been afraid to do for years.

Officials also disclosed detailed estimates of potential losses at individual banks, concluding that losses could skyrocket at institutions with particularly risky loan portfolios. At Wells Fargo, which was a major subprime mortgage lender during the housing boom, regulators estimated that losses on first mortgages would hit almost 12 percent of its loan portfolio if the adverse situation proved correct. At Morgan Stanley, regulators estimated, loss rates from commercial real estate loans could potentially exceed 40 percent.

But analysts increasingly agree that the economic outlook has brightened considerably in the last month or so.

Mr. Geithner and top White House officials worked carefully to manage public expectations and avoid the kind of scathing reaction that greeted the Treasury's first big announcement in February of plans to rescue the banking system.

Unlike in February, when both Mr. Geithner and President Obama raised expectations in advance, then unveiled only vague concepts, Mr. Geithner took much of the surprise out of the results by emphasizing early on that all the big banks were solvent. The only question, he said over and over, was whether they had enough capital to withstand a downturn that was even worse than the one already under way.

In addition, Treasury and Fed officials remained tranquil as most of the results dribbled out through leaks. As a result, the results seemed almost anticlimactic when they finally became public.

PHOTOS: Ben Bernanke, the Fed chief, who spoke by satellite to a Chicago meeting, says he has tried to steer a middle course on banking.(PHOTOGRAPH BY JOHN ZICH/BLOOMBERG NEWS)(A1); Citigroup will have to produce another $5.5 billion on top of the $45 billion it would acquire with the Treasury as shareholder.(PHOTOGRAPH BY JOHN GRESS/REUTERS); Federal regulators told Bank of America, based in Charlotte, N.C., that it would have to come up with $34.9 billion in capital.(PHOTOGRAPH BY CHUCK BURTON/ASSOCIATED PRESS); Wells Fargo, which was a major subprime mortgage lender during the housing boom, will have to find $13.7 billion.(PHOTOGRAPH BY JUSTIN SULLIVAN/GETTY IMAGES)(A3)

Correction: May 9, 2009, Saturday
An article on Friday about results of the stress tests by federal regulators on 19 large banks misstated the amount of capital the regulators said Bank of America must raise. It is $33.9 billion, not $34.9 billion. The error was repeated in a picture caption with the continuation of the article.

Correction: May 9, 2009, Saturday
An article on Friday about results of the stress tests by federal regulators on 19 large banks misstated the amount of capital the regulators said Bank of America must raise. It is $33.9 billion, not $34.9 billion. The error was repeated in a picture caption with the continuation of the article.